Wage growth picks up which may improve household purchasing power, figures show

“From a jobseeker perspective, relatively high nominal wage growth means that posted wages have now been growing faster than consumer price inflation in Ireland for five consecutive months,” said Mr Adrjan.  Picture: iStock

Household purchasing power may improve this year due to a slight rise in wage growth, but this could derail plans by the European Central Bank to reduce interest rates further, a report suggested. 

Irish wage growth crept upward to 4.3% last month, up slightly from the 4% to 4.1% range recorded since the start of this year, according to a report released by jobs site Indeed in collaboration with the Central Bank.

Economist at Indeed Pawel Adrjan said households are regaining some of the losses in purchasing power incurred over the last two years during a period of inflationary pressures and subsequent interest rate hikes.

“From a jobseeker perspective, relatively high nominal wage growth means that posted wages have now been growing faster than consumer price inflation in Ireland for five consecutive months,” said Mr Adrjan.

The Wage Tracker showed the growth rate is now higher than its pre-pandemic level of 2.5%, but remains below its peak of 6.4% in August 2022.

Mr Adrjan said the gradual decline is “in line” with slowing wage growth in most large eurozone countries amid falling inflation and a decrease in job posting as labour markets stabilised post-pandemic.

The upward trend in employee compensation may prompt policymakers at ECB to take a more cautious approach when it comes to further interest rate reductions.

“The fact that wage growth remains above its pre-pandemic norms is a concern for some ECB policymakers, as they worry that high wage growth across the euro area may drive continued persistence in inflation in the service sector, where labour accounts for a high share of firms' costs,” said Mr Adrjan.

The ECB is due to meet again next week before it breaks for the summer in August. The regulator has already implemented one interest rate cut of 0.25% last month, bringing its key lending rate down to 4.25%. The ECB began its campaign to drive down inflation in July 2022. 

Eurozone inflation has since cooled to around 2.5%, just over its target of 2%, but the regulator has expressed caution around cutting rates prematurely which could fuel price pressures. 

Market experts have priced in at least one more reduction before the end of the year with some analysts more optimistic with their predictions of two more cuts before 2025.

Indeed estimated annual growth in total eurozone wage inflation was 5% by the end of June, up from 4.9% in the first three months.

The pace of growth has eased from the post-pandemic peak of 5.5% reached in 2023, but the jobs site suggested the increase is “a sign that aggregate wage growth is likely to remain high in the euro area through 2024.” The report indicated that the staggered nature of real-wage catch up is a result of more collective bargaining in Europe.

Meanwhile, wage growth in Ireland’s already tight labour market has become challenging for some employers, according to an industry representative body. Isme is expected to appear at a Finance Committee on Wednesday to discuss the impacts of wage inflation on small and medium sized companies.